VI. PG&E's Advice Letter (AL) Filing

A. Overview

The Rate Design Settlement provides that the actual revenue requirement changes will be made by PG&E by advice letter filing pursuant to the Modified Settlement Agreement and D.03-12-035, and will be effective January 1, 2004. Changes to customer rates would be reflected in customer bills upon Commission approval of the new rates reflected in the advice letter. On January 26, 2004 PG&E filed AL 2465-E consistent with this provision of the Rate Design Settlement. By letter dated January 28, 2004 the Commission's Executive Director shortened the period for protests and responses to protests on this advice letter because the Commission desires to address it expeditiously.

PG&E proposes in AL 2465-E a total 2004 revenue requirement of $9.49 billion, $9.065 billion of which is allocated to bundled service customers and $425 million allocated to DA customers. Generation-related revenue requirement decreases by approximately $1.101 billion and non-generation revenue requirements increase by $241 million under the proposal. This proposed revenue requirement would result in an overall revenue reduction of $860 million, with bundled service customers receiving a $878 million decrease, and DA customers receiving a $18 million increase. PG&E proposes that rates filed in AL 2465-E be implemented in customer bills on March 1, 2004, and that it track any electric revenue requirement overcollection between January 1 and March 1, 2004 and return the overcollection in future rates.

Our intent is to flow through to customers the benefits of revenue requirement decreases associated with the Modified Settlement Agreement adopted in D.03-12-035 as soon as possible. We will not approve any increases under the expedited schedule in this case. We therefore deny without prejudice the annual revenue requirement increase of $18 million for direct access customers proposed by PG&E in AL 2465-E. PG&E can track the revenue requirement for direct access customers for implementation after a decision in Phase 1 of PG&E's 2003 general rate case.

Consistent with our desire to make rate reductions resulting from
D.03-12-035 effective as soon as possible, we will not wait to return to customers electric revenue requirement overcollections between January 1 and March 1, 2004 in future rates as PG&E proposes in AL 2465-E. Instead we require PG&E to return these overcollections to customers through a one-time bill credit or refund to customers no later than May 1, 2004.

B. Protests to the AL

AReM, TURN, and UCM submitted protests on AL 2465-E on February 4, 2004, and DWR submitted a memorandum commenting on the AL. PG&E responded to these protests and comments on February 6, 2004. We address them in turn.

1. AReM

AReM asserts that AL 2465-E is flawed in that it: (1) implements the settlement that unlawfully discriminates against DA customers by allocating the revenue reduction solely to bundled service customers; (2) unlawfully increases rates without a hearing; and (3) provides for a regulatory asset surcharge to be aggregated with generation charges on bills rather than appearing as a separate line item. AReM also states that AL 2465-E highlights the urgency of the need for the Commission to adjust the benchmark used to calculate ongoing CTC to more accurately reflect current market conditions. AReM recommends that the Commission reject AL 2465-E and set a procedural schedule for Phase 1 of the Energy Resource Recovery Account (ERRA) proceeding that provides for resolution of the CTC benchmark issue.

In response to AReM's claim that the Rate Design Settlement unfairly discriminates against DA customers PG&E points out that those customers receive benefits, e.g., that application of the regulatory asset revenue requirement does not increase the DA CRS. PG&E states that AreM's proposal would prevent PG&E from collecting the DA CRS from certain DA customers at this time. PG&E argues that if AReM's proposal prevails, DA customers would avoid paying non-generation charges which they are obligated to pay.

PG&E states that AReM's argument that AL 2465-E unlawfully raises rates without a hearing ignores the difference between an application for an increase and an advice letter to implement an increase. In response to AReM's proposal that bundled customers' bills show CTC and the regulatory asset charges, PG&E asserts that it is not necessary to show that information. With regard to the CTC market benchmark matter PG&E notes that it is considering updating its CTC market benchmark in its 2004 ERRA proceeding, A.03-08-004. PG&E states that if it utilizes an updated benchmark in its February 13 ERRA update, it will supplement AL 2465-E accordingly.

AReM states that AL 2465-E is discriminatory since it implements the Rate Design Settlement which allocates all reductions to bundled customers. According to AReM, DA customers made significant contributions to PG&E's headroom during 2001 and 2002 through payment of the 1-cent per kWh surcharge and residual CTC. Thus AReM concludes that DA customers should be allocated a proportionate share of the reductions. We will not require PG&E to modify its tariffs to implement reductions for DA customers. We address this issue more fully above in the section addressing AReM's comments on the Rate Design Settlement. AReM's protest on these reductions for DA customers is denied.

AReM argues that the Commission cannot approve AL 2465-E since it would implement increases for DA customers, and that would require hearings. As discussed above we will not impose increases at this time on DA customers in our implementation of the Rate Design Settlement. In light of that, AReM's protest regarding increases for DA customers is denied as moot.

AReM notes that AL 2465-E provides for CTC and the regulatory asset charge to be collected from DA customers as separately identified components of the DA cost responsibility surcharge. AReM states that both CTC and the regulatory asset charge should appear as a separate line item on the bills of PG&E's bundled customers so that DA customers will not mistakenly think they can avoid these charges by returning to bundled service. Providing this information on bundled customers bills will enhance customers' knowledge of what cost components they are responsible for paying. We grant AReM's protest on this bill presentation matter. PG&E shall show CTC and the Regulatory Asset charge as separate line items on bundled customers' bills, as well as the other items delineated in the Bill Format section above.

AReM's request that we set a procedural schedule for Phase 1 of the ERRA proceeding to provide for resolution of the CTC benchmark issue is beyond the scope of PG&E's AL 2465-E. We deny this aspect of AReM's protest without prejudice. Furthermore, PG&E shall not supplement AL 2465-E to reflect a new CTC market benchmark unless the Commission adopts a new benchmark prior to March 1, 2004, in its ERRA proceeding, A.03-08-004.

2. DWR

DWR states that PG&E should withdraw its unilateral proposal to reduce DWR's 2004 revenue requirements by $79 million, the amount that PG&E anticipates DWR will receive during 2004 as a result of the El Paso Natural Gas Company settlement (El Paso settlement). DWR asserts that PG&E's proposal to incorporate this $79 million reduction would violate the rate agreement between the Commission and DWR adopted in D.02-02-051 and would conflict with
D.03-10-087 which addressed the El Paso settlement. In D.03-10-087 the Commission determined that DWR will reduce its revenue requirement by the amount of the El Paso consideration, and the Commission will then implement DWR's reduction in revenue requirement as part of our periodic proceedings to implement revisions to the DWR revenue requirement.

DWR notes that although El Paso has started to contribute settlement amounts to an escrow fund, it has not received any consideration from the El Paso settlement and that DWR will not receive any such consideration until certain conditions precedent are met including the resolution of any appeals. DWR states that apart from a footnote in the advice letter, there is nothing to explain how PG&E determined that its customers' share of the El Paso settlement is $79 million. According to DWR, once the El Paso settlement is finalized and DWR receives consideration, DWR intends to examine its impact which could lead to a reduction in DWR's revenue requirements.

DWR has two concerns about the proposed power charge balancing account (PCBA) rates that PG&E proposes in AL 2465-E. The purpose of the PCBA is to record the difference between the amount derived from PCBA rates as a component of the total rates paid by bundled customers and the amount of DWR power charges collected from bundled customers on behalf of DWR. DWR's first concern is that the proposed PCBA rates will likely be different from the DWR power charge rate. DWR states that any moneys received by PG&E on behalf of DWR must be held in trust for the benefit of DWR, citing Water Code § 80112, and the PG&E servicing order adopted by D.02-12-072 as modified by D.03-09-017 at § 2.3. DWR notes that DWR power charges are to be held by PG&E in trust and remitted to DWR. PG&E proposes to determine its charges to customers by one rate and remit DWR power charges at another rate. DWR states that Division 27 of the Water Code and the financial structure of DWR's bond issue contemplate that payment for DWR power comes from retail customers, not PG&E, and those payments must be property of DWR.

In addition, DWR is concerned that the PCBA rate component will be subsumed in another component of bundled electric rates termed "PG&E Generation Costs". DWR maintains that since DWR power charges are not PG&E costs a more appropriate title should be used for this component of rates to avoid confusion or implication of conflict with Division 27 of the Water Code and the financial structure of the bond issue. DWR has conferred with PG&E about these concerns and intends to continue to work with PG&E to address them.

PG&E replies to DWR's protest that it incorporated the El Paso settlement refunds expected to be received in 2004 into the revised calculation of the regulatory asset revenue requirements. PG&E also incorporated its expected share of the El Paso settlement refunds as a reduction to the 2004 DWR power charge revenue requirement. PG&E states that its proposed 2004 rates will need to be adjusted by approximately $79 million since DWR is refusing to incorporate PG&E's share of DWR's El Paso settlement refunds expected to be received in 2004. PG&E agrees with the representation of the language regarding the intent of the PCBA provided by DWR in its protest. PG&E also states that it does not consider the DWR power charge as part of PG&E's generation costs.

Reducing the DWR revenue requirement by an estimated $79 million to account for its customers' share of the El Paso settlement would conflict with the Rate Agreement between DWR and the Commission. Section 4.1(a) of the Rate Agreement states in part that the Commission agrees to cooperate with and assist DWR in its review, determination and revision of its retail revenue requirement at the request of DWR. According to that same section, DWR shall promptly notify the Commission following any determination or revision of the retail revenue requirements. DWR notes that Section 6.1(a) of the Rate Agreement provides in part that the Commission covenants and agrees to calculate, revise, and impose from time to time, power charges sufficient to provide moneys in the amounts and at the time necessary to satisfy the retail revenue requirements specified by DWR. DWR has not notified the Commission that its revenue requirement has changed as a result of the El Paso settlement.

Reducing the DWR power charges PG&E collects from customers by an estimated $79 million would also modify D.03-10-087. That decision requires that the Commission implement the pass through to retail customers of DWR's reduction in revenue requirement only after DWR reduces its revenue requirement to reflect the El Paso settlement.

The Water Code and the Servicing Order adopted by D.02-12-072 as modified by D.03-09-017 require that any moneys received by PG&E on behalf of DWR must be held in trust for the benefit of DWR. Even if it were clear that PG&E's customers' share of the El Paso settlement will be $79 million this year we cannot adjust DWR's charges now.

It is not clear that DWR will receive consideration from the El Paso settlement this year. Nor is it clear that PG&E's customers' share will be $79 million. The San Diego Superior Court order approving the El Paso settlement in Natural Gas Anti-trust Cases I, II, III, & IV, J.C.C.P. Nos. 4221, 4334, 4226, & 4228 was appealed on February 3, 2004.

DWR's request advocating that PG&E withdraw its proposal to reduce DWR's 2004 revenue requirements by $79 million is granted. PG&E shall amend AL 2465-E and submit revised tariffs to reflect this change. DWR's request regarding the classification of the PCBA rate component is also granted. PG&E shall revise its tariffs to clarify the function of the PCBA and that amounts collected for DWR are not PG&E's generation costs.

3. TURN

TURN notes that PG&E neglected to include in its proposed tariffs an appropriate rate schedule by which to recover the costs of the Regulatory Asset (and perhaps other costs) from those departing load customers not exempted from such charges under the terms of the Rate Design Settlement agreement and other relevant Commission decisions. TURN states that absent such a tariff, no revenues will be recovered from departing load customers, and costs will instead be shifted to bundled service customers, contrary to Commission policy and state law. TURN asserts that PG&E should be directed to file a new version of its former tariff E-Depart to recover the appropriate costs from departing load customers who are not exempt from the relevant charges.

In response to TURN's protest, PG&E states that it agrees that it is appropriate to submit revised tariffs clarifying how new rates proposed in AL 2465-E will be recovered from departing load customers not exempt from the relevant charges. PG&E filed proposed tariff language in response to TURN's protest.

In our discussion of Modesto's comments on the Rate Design Settlement, we found that contrary to Modesto's assumption, the settlement agreement does not exclude municipal departing load from any responsibility for revenue requirement associated with the regulatory asset. As such, PG&E should have included tariffs in AL 2465-E presenting new rates to collect the revised revenue requirement from municipal departing load customers. Accordingly, we grant TURN's limited protest and require PG&E to file revised tariffs to present rates for departing load customers who are not exempt from the relevant charges. On February 18, 2004, PG&E filed AL 2475-E formally revising the tariffs to clarify that departing load customers are responsible for payment of the Regulatory Asset Charge. Therefore, we do not at this time approve the proposed tariffs that PG&E submitted with its response to TURN's protest.

4. UCM

UCM states that the rates proposed in AL 2465-E would actually result in a rate increase of 30 to 79% for CARE-eligible, non-profit group living facilities. UCM states that the imposition of a substantial rate increase on these low-income customers is contrary to the stated goals of both the Commission and the Legislature. UCM requests that we reject AL 2465-E consistent with its expressed views.

In response to UCM, PG&E states that UCM's calculations are off the mark and do not model PG&E's proposal for determining bills for commercial CARE customers. In developing its proposal PG&E was aware that its method may not produce bills for every customer equal to the bills the customer pays today. PG&E calculated bill impacts for its commercial CARE customers in preparing a response to UCM's protest. In performing its calculation PG&E discovered that the discount rate it filed in AL 2465-E was incorrect. PG&E found that under its proposal using the corrected rate the vast majority of bills either decrease or do not increase more than five percent. According to PG&E, in the small number of cases where the bill increases exceed five percent, the dollar impacts are relatively small. For example, the small number of customers on Schedules A-1 and A-6 whose bills increase by more than five percent would on average see increases of $5.50 per month on monthly bills which average about $75. PG&E states that it will revise AL 2465-E to correct the CARE rate that it discovered was in error.

The protest of UCM is denied without prejudice as moot. As discussed above, we will not impose rate increases in this expedited case. The issue UCM raises here is the same as that Visalia Senior Housing (Visalia) has raised in its petition for modification of Edison's post-PROACT decision, D.03-07-029 in
A.03-01-019. UCM represents Visalia in that case. A decision on that petition is pending. We will take appropriate action as required after we resolve this issue in Visalia's petition for modification of D.03-07-029. In the meantime, PG&E shall modify AL 2465-E to the extent necessary to ensure that all CARE-eligible customers do not receive any rate increases at this time. PG&E may track undercollected revenues, if any, associated with this revision for disposition, pending the outcome of our decision in Visalia's petition for modification of D.03-07-029. PG&E shall also modify AL 2465-E to correct the CARE rate it has discovered is in error.

C. Summary of Changes We Direct to AL 2465-E

PG&E shall amend AL 2465-E by submitting a supplemental advice letter filing on or before March 1 to make the changes we require today, including all tariff, form, and bill format changes necessary to implement the following revisions: (1) include a one-time bill credit or refund of the revenue requirement overcollection for the months of January and February 2004 which shall be implemented no later than May 1, 2004; (2) remove the $18 million revenue requirement increase for DA customers and track any resulting revenue requirement undercollections for these customers in appropriate regulatory accounts; (3) show CTC and the regulatory asset charge on bundled customers' bills as separate line items; (4) increase the DWR power charge revenue requirement by $79 million from $1.694 billion to $1.773 billion; (5) modify its tariffs consistent with our discussion concerning DWR's issues in Section VI.B.2 above; (6) reflect in tariffs that those departing load customers that are not exempted from the regulatory asset charge shall be assessed that charge; (7) ensure that all CARE customers do not receive any rate increases at this time and track any resulting undercollection of revenues in regulatory accounts; and (8) correct the CARE rate PG&E has discovered is in error.